What is Algorithmic Trading?

Algorithms are simply a set of rules. They describe and lay out a specific set of instructions that must be met to carry out a certain task. When algorithms are set up to define trading forex, they can be referred to as algo-trading, black-box trading or simply automated trading. Once an algorithm is set up, the computer can quickly to through the required checks and balances and come up with a trade before you can even think about what’s happening. That is the advantage. They can carry out a process at lighting speeds. Once set up, you can sit back and watch the computer go to work, but of course someone must be the brains behind the programming.

Algorithms for Trading Strategies

Since strategies for trading follow specific rules, they are ideal to be incorporated into software that will race thru any given criteria for you, saving valuable time with unfailing accuracy. Algorithms that are set up to track trends are the most popular. They can be programmed to follow moving averages, price level movements, breakouts or indicators that are relevant. With trading decisions that are based on trends, there aren’t any complicated forecasts or predictions involved. The trades are simply based on trends. Other types of strategies, such as arbitrage opportunities or those based on mathematics can be programmed as well. Mean reversion, or trading range strategy, pulls together the notion that low and high prices of any given asset are only temporary and that they will automatically revert to their base value. An algorithm can help identify this price range and suggest trades when the price breaks in or out of the defined range.

Benefits of Algo-Trading

By setting up algorithms to handle your forex trading, you’re taking a lot of guesswork and human emotion out of the process. Here, the heavy work is done in creating and developing the strategy that works best. Then, according to your rules, the program will execute trades at the most appropriate time for the best price. Since the orders are instant, you will have the opportunity to make an increased number of trades each day. The time it takes for a person to process all the data to make a decision takes so long that the number of daily trades is limited. And not only that, but algorithms are accurate, so the amount of errors made when placing orders will be reduced. The computer will automatically check the market conditions in several places at once. Algo-trading is especially efficient with high frequency trading (HFT), which takes advantage on making large numbers of trades very quickly across multiple markets, using various decision parameters. With this quick and clear thinking, your orders will be instantly placed at the perfect time, so you don’t miss out.

Forex is highly competitive and you must be fast on your feet to get ahead. Carefully written algorithms can be the leading edge you need to increase profitable trades.

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